Tips for beginners – how to set prices for products and services
If my goal is to reach the same level of income as I earned with my full-time job, how much should I charge for my work? How much do I need to earn to cover all my business expenses? What if I set my prices too high and it scares away potential clients or customers?
It’s hard to put a price tag on your own work, especially when you’re just getting started and don’t really have a good understanding of your overhead costs.
Though it may be difficult and confusing, pricing is absolutely key to running a business. It affects how people perceive your product or service offering, and can influence whether or not you’ll be able to attract clients. Above all, your pricing (that is to say, your income) is the lifeblood of your business. If you don’t make enough money, you won’t be able to maintain your overhead.
This is why it’s so crucial to set appropriate prices from the very beginning – to ensure that enough money is coming in to make your business a success. Here, we’ll guide you through the typical pitfalls and share our tips to help you find the right price level.
3 typical pricing mistakes
1. You guessed your prices
One mistake beginners often make is setting their prices without proper research or calculations. It seems easy to estimate the amount of hours required to do the job, add a little extra just in case and calculate the total price based on this rough calculation. If you’re selling physical products, you might just pick a price that “feels right”.
Though you might feel like trusting your gut it the way to go here, setting “guessed” prices for your products or services isn’t ideal for your business. First, you run the risk of underpricing your work because you haven’t included all possible side costs. Second, if you set the prices incorrectly, you probably won’t reach the clients you were hoping for – whether the price is too high or too low.
2. You copied prices from competitors
It may seem like an easy solution to the pricing problem – just take a look at your competitors’ prices, and go with that. Although this strategy appears to be foolproof (after all, they’re doing it), you should probably avoid it.
It’s smart to research what your competitors are charging to a get a general idea of pricing in your field, but copying the exact prices of your competitors isn’t the best idea. As an outsider, you never really know what’s behind these prices. A number of factors may have influenced their numbers, including location, size, offer or brand.
Also, if your prices are exactly the same as your competition, you won’t exactly stand out. (Though, keep in mind that standing out doesn’t always mean lower prices – if your product or service is better, your prices should reflect this.)
3. Your prices are too low
The most typical mistake unexperienced freelancers and entrepreneurs do is to sell their work at too low a price. There are many reasons for this:
They lack confidence
They don’t have experience running a business
They’re afraid higher prices will scare away clients
They base their pricing on their previous salary
They calculate their prices based on the work hours rather than the value it brings to their client
This is all very understandable. New entrepreneurs face a steep learning curve when starting a new business, and they simply can’t be experts in everything. But remember: every project you finish adds to your experience and expertise, and this should be reflected in your prices.
Calculating your prices – what to consider
Many freelancers and entrepreneurs have worked in regular full-time jobs before jumping into entrepreneurship. When this is the case, it’s easy to make the mistake of billing your work based on your previous salary.
Let’s make a simple calculation to show why you shouldn’t do this.
Say you want to make 3,000 euros per month. You count that there are approximately 21 work days per month and 8 work hours per day. This brings you to 168 work hours per month.
Next, you divide your monthly pay by total work hours:
3,000 euros / 168 hours = 17,86 euros
Around 18 euros – that sounds like a reasonable hourly wage!
But not so fast – this calculation doesn’t take into account all of the side and overhead costs that you as an entrepreneur have to take care of, like:
Additionally, what’s missing from this calculation is the work hours you’ll miss if you get sick, take vacation time, or spend time developing your skills.
Most importantly, 21 work days every month isn’t a realistic goal – unless you never want to take a vacation!
Moreover, as an entrepreneur, you simply won’t have time every day to complete eight hours of billable work. You need to invest time in marketing, return emails and, inevitably, handle some bureaucratic paperwork. If you optimise the time spent on money management, you’ll have more time to spend on the work that you actually get paid to do.
And of course, you have to pay taxes. Taxation varies depending on your location and your company’s business entity; remember to consider this when setting your prices.
To reiterate: don’t underprice your work. If you don’t make enough money, it’ll be very hard for you to develop and maintain your business. After all, the cheaper you sell, the more you have to sell.
For example, if you sell your own expertise, or products you make by hand, you won’t be able to scale your work endlessly. In other words, your time is limited so if your hourly pay is too low, you won’t be able to earn more by simply working more hours.
And remember: low prices attract stingy clients. It’s ill-advised for a small business to base its competitive advantage on cheap prices.
So set your prices at the right level from the very beginning, and make sure your business doesn’t come to its end before it gets started!
Tips to calculate your hourly rate
As we’ve seen in the calculation above, there are many side costs to take into account when determining your pricing.
Now that you have a better understanding of what prices are based on, it might not seem so far-fetched that graphic designers and business consultants can charge 100 euros per hour. You may have heard the rule of thumb that advises you to double (or even triple!) the amount of money you would like to earn. This is solid advice, but we still recommend that you make more precise calculations.
Some unions and other associations publish pricing recommendations for freelancers. If you’re able to find such recommendations for your industry, it’ll give you a good idea of the price levels in the market.
After examining the general price level, you should map out all your costs and calculate the hourly rate that can cover your costs and still provide a decent pay. There are many pricing calculators available online.
Another good guideline is to base your pricing on the value you bring to your client, not the amount of your work hours. Your client probably isn’t interested in how many hours the work takes, but rather how you can solve their problem.
This model of pricing allows you to charge higher prices. If you’re skilled and your work brings significant added value to your client, it doesn’t really matter to them what your monthly pay is. You don’t have to work on a minimum wage if the client is willing to pay more.
For example, say you design a website for your client. A great website helps your client reach more customers and increase their revenue. If you’re experienced in designing innovative websites that drive your client’s sales, your compensation shouldn’t be based just on the hours you used on the project – your pricing should reflect the total value your client gets out of your work.
Make sure to communicate the value of your work, not just the work hours. This will help you to maintain your prices on a level where you’ll end up with more than just the minimum wage. Your client won’t see you as billed hours – they’ll see you as a person who brings value to their business. And who wouldn’t want that?
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